California Labor &
Employment Law Blog
Employment Terminations and Severance Agreements in Business Transactions and Restructurings
Jul 21, 2023

Employment Terminations and Severance Agreements in Business Transactions and Restructurings

Topics: Business Transactions and Restructurings

Welcome to the monthly installment from CDF’s Business Transactions and Restructurings Group, highlighting labor and employment issues that can arise in business deals.  

To Terminate Or Not Terminate, That Is The Question.

Whether selling, acquiring, or restructuring a business, the complex issue of employment relationships and what to do with them should be considered as early in the process as possible. There are often sound business and legal reasons, affecting all sides of a deal/restructure, for the selling entity to formally terminate employment relationships with its employees prior to the close of a transaction. This is true even where the parties anticipate that the universe of the seller’s employees will seamlessly commence employment with the acquiring entity. On the other hand, there are also competing and equally compelling reasons not to terminate those relationships, making the risks of doing so “not worth it.”

Terminating the employment of a seller’s employees can mitigate risks of exposure to liability for employment-related claims and provide a bright-line date of termination from employment by one entity before employment commences with another entity. This is particularly beneficial if the subsequent employment will likely be with the entity acquiring the business, and the seller’s former employees will continue to work in the same facility post-acquisition, performing the same functions, using the same equipment and reporting to the same management. A formal and clearly documented employment termination protects both the seller and the buyer.   

On the other hand, the costs of terminating employment relationships can be significant. At termination, employees must be paid all wages owed, accrued vacation time, and potentially severance pay. These costs may render employment separation unattractive. In addition, there are practical implications of employment separation that can complicate the buyer’s transition and create unwanted delays in setting up operations, payroll, and benefits. A seller may also decide not to terminate its employees in the interest of maintaining confidentiality about the transaction and avoiding uncertainty about retaining the necessary personnel to promote a smooth transition in ownership.

In either scenario, the employment-related aspects of a transaction are a process, not an event, and assessing these issues early can help ensure there is sufficient time to either adequately prepare for employment terminations, or set up the framework for a smooth employment transition. Starting this process early may also enhance the business value of the transaction to the parties, give the buyer a negotiating tool and the seller an added “asset,” and reduce the need for post-transaction adjustments or escrows. So, while employment law issues are not necessarily the primary driver in determining whether or not to sever employment relationships and what terms to include in a severance agreement, addressing these issues proactively can minimize post-transaction problems and potentially improve deal value.

Severance Agreement Issues.

If the seller of a business decides to terminate all employees at the closing of the business transaction, severance agreements should be approached thoughtfully as they can offer much more than a mutually beneficial arrangement between employee and employer that helps to ease the affected employees’ transition to new opportunities. A well-crafted and properly negotiated severance agreement has the potential of providing a seller and a buyer with such benefits as: a valuable waiver and release of claims from the employee; a class action waiver and arbitration agreement; an acknowledgment and acceptance of robust terms identifying and protecting against the unauthorized use or disclosure of the selling entity’s confidential and proprietary business and trade secret information; and the creation of a framework for the return of company property. Such terms simultaneously secure some level of peace for the seller and buyer that their exposure to litigation post-transaction can be mitigated and potentially protect and improve the value of the assets that are the subject of the transaction.  

A one-size-fits-all severance agreement template will not be adequate, as employment termination laws vary significantly by state, and can be affected by a number of factors, including employee age and the number of employees separating from employment. The laws governing the permissible scope of confidentiality and non-compete terms rest on shifting sands and severance agreements should be drafted in consideration of the precise time and circumstances for which they will be used. Finally, if the employer is unionized, the ability to use severance agreements may require negotiations first.

It may, at first blush, appear desirable to obtain agreements that cover “all of your bases” by including the broadest range of release terms possible. However, a waiver and release comes at a price. Determining how much an employer is willing to pay in exchange for a waiver and release can be complicated by issues such as what amount of money an employee and a court will deem sufficient consideration, and complications of individual negotiations with employees around that amount.

Here are some basic legal considerations for drafting a severance agreement.

  1. Some claim waivers require consideration and revocation periods.
    • The federal Older Workers Benefit Protection Act entitles employees over the age of 40 to certain rights in considering a release of claims, if the claims released will include a claim under the Age Discrimination in Employment Act. Employees over 40 are entitled to specific disclosures in writing. In addition, employees over 40 being terminated as part of a group or class of employees (more than one) are entitled to a consideration period of 45 days. Even if they sign the agreement within the 45-day period, they are entitled to an additional 7 days to revoke the agreement. Given these requirements and the risks associated with obtaining waiver and release of such claims, employers should consider excluding them from the waiver and release to ensure the waiver and release of other potentially riskier claims.
    • Some states have their own consideration and revocation periods as well. For example, in California, regardless of age, effective January 1, 2022, employees are entitled to a consideration period of 5 business days and must be informed of the right to consult an attorney for most severance agreements.
    • Some states may also have required language in order to enforce certain provisions, like the California law discussed below concerning confidentiality provisions, as well as in our blog post, here.
       
  2. Ensure the release specifically includes successors to the seller to capture downstream liability issues.
    • However, employers should avoid drafting language that creates an admission or agreement that the buyer is a successor-in-interest.
       
  3. Ensure the agreement reminds employees of any obligations they may have regarding the seller’s tangible property and intellectual property.
    • Clearly identify property that the employer treats as confidential and proprietary business and trade secret information, and the ways in which the employer protects such property against unauthorized use and disclosure.
    • While businesses may want to exercise some control over the narrative of a transaction, depending on the applicable state law, confidentiality and non-disparagement provisions may need to be scaled back. For example, in California, employers need to ensure that any confidentiality provision presented in a severance agreement does not seek to silence an employee who wishes to speak out about unlawful acts in the workplace. Transactions impacting non-California employees can trigger concerns too. Just a few months ago, the NLRB opined that confidentiality and non-disparagement provisions involving non-supervisory employees should be narrowly tailored, a decision that has retroactive application. CDF discussed this earlier this year, here.
    • Employers should be careful not to include non-compete or non-solicitation provisions that violate the applicable state’s laws. For example, non-compete provisions are generally unenforceable against employees in California by statute, and non-solicitation agreements are being increasingly scrutinized by the California courts.
      • Avoid the temptation of including non-compete or non-solicitation language even though it is not enforceable, “just in case.” Incorporating such unlawful terms into the agreement can create more serious problems for the employer and a potential basis for invalidating the entire severance agreement on unconscionability grounds.
      • California has robust laws protecting against the unauthorized use and disclosure of confidential and proprietary business and trade secret information. Therefore, some of the concerns that non-competes and non-solicitation agreements are meant to address can be covered with a well-drafted section protecting the company’s property.
         
  4. Assess whether there are other state-specific considerations that may affect the seller’s decision to prepare severance agreements that apply to multiple states to ease the administrative burden.
    • Depending on the density of employees affected in a particular state during a group layoff, employers should seriously consider presenting severance agreements tailored to that particular state’s legal requirements. Employers should work with their counsel to evaluate the severity and number of laws applicable to severance agreements in a particular state, the number of employees affected by the transaction in a particular state, and cost considerations, to determine whether these factors warrant the preparation of separate severance agreements specific to each impacted state. 

If you are planning or anticipate the possibility of a transaction or restructuring, CDF is here to collaborate with your deal team and provide employment law subject matter expertise to help you achieve your goals. Please reach out to your favorite CDF attorney for guidance and strategy on how to best approach these important employment issues.  

About CDF

For over 25 years, CDF has distinguished itself as one of the top employment, labor and immigration firms in California, representing employers in single-plaintiff and class action lawsuits and advising employers on related legal compliance and risk avoidance. We cover the state, with five locations from Sacramento to San Diego.

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About the Editor in Chief

Sacramento Office Managing Partner and Chair of CDF’s Traditional Labor Law Practice Group. Mark has been practicing labor and employment law in California for thirty years. His practice has a special emphasis on the representation of California employers in union-management relations and handling federal and state court litigation and administrative matters triggered by all types of employment-related disputes. He is also adept at providing creative and practical legal advice to help minimize the risks inherent in employing workers in California. He recently named “Sacramento Lawyer of the Year” in Employment Law-Management for 2021 by Best Lawyers®.
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